American Economic Review Vol. 104 No. 4 2014

Bidding for Incomplete Contracts: An Empirical Analysis of Adaptation Costs

Patrick Bajari¹; Stephanie Houghton²; Steven Tadelis³

¹ Department of Economics, University of Washington, Box 353330, Savery 305, Seattle, WA 98195, and NBER (e-mail: ) · ² Department of Economics, University of Texas, 2225 Speedway, Stop C3100, Austin, TX 78712 (e-mail: ) · ³ Haas School of Business, University of California Berkeley, 2220 Piedmont Ave., Berkeley, CA 94720, and eBay Research Labs (e-mail: )

Abstract

Procurement contracts are often renegotiated because of changes that are required after their execution. Using highway paving contracts we show that renegotiation imposes significant adaptation costs. Reduced form regressions suggest that bidders respond strategically to contractual incompleteness and that adaptation costs are an important determinant of their bids. A structural empirical model compares adaptation costs to bidder markups and shows that adaptation costs account for 7.5–14 percent of the winning bid. Markups from private information and market power, the focus of much of the auctions literature, are much smaller by comparison. Implications for government procurement are discussed.

DOI

10.1257/aer.104.4.1288

Volume

104

Issue

4

Pages

1288-1319

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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